RBI panel holds out hope for borrowers

OUR SPECIAL CORRESPONDENT

Mumbai, April 10: In an effort to bring relief to borrowers of floating rate loans, an RBI panel today recommended that banks should reset interest rates on specific dates, irrespective of the change in the base rate.

The committee headed by former RBI deputy governor Anand Sinha also asked banks not to arbitrarily increase the interest rate spread over the base rate unless there was a deterioration in the credit profile of a customer.

The panel was set up to examine issues related to the discrimination in the pricing of credit and recommend measures for transparent and appropriate pricing of credit under a floating rate regime.

Concerns have been raised over the tweaks in interest rates not being in sync with the changes in policy rates, the discriminatory treatment towards old borrowers vis-à-vis new borrowers and the arbitrary changes in spreads.

Lenders often increase the spreads charged to retail home loan borrowers following revisions in the policy rate or liquidity tightness in the system. According to the panel, once a spread has been determined, it should only be revised if there is a fall in the credit profile.

“For a given customer, once a spread has been determined after looking at all the factors, including his credit profile and customer relationship with the bank, such a spread should not be increased except on account of deterioration in the credit risk profile of the customer. There should be a loan covenant to this effect,” the working group said.

The panel suggested that any change in the base rate, which is the minimum interest rate at which banks lend, should not result in an immediate change in the floating interest rate of existing loans.

To impart better transparency to customers so that they know when the rates are due for a change, the panel feels the covenant of the floating rate loan should have mandatory reset dates (monthly, quarterly, half-yearly). The loans should be changed only on these dates, irrespective of the changes made in the base rate, even if its within the reset period.

The State Bank of India, however, feels whenever there is a change in the base rate, it should be passed on to the customers.

Transparency

To bring transparency in the pricing of credit, the panel suggested that the Indian Banks’ Association develop a a new benchmark for floating interest rate products, namely, the Indian Banks Base Rate (IBBR), derived from the base rates of large banks. Banks could subsequently offer floating rate products linked to IBBR.

The committee said initially IBBR could be used for home loans. At the time of sanction, banks should ensure that the lending rates should be equal to or above this benchmark rate.

The base rate of banks, against which home and other loans are given, have shown a divergent trend with the increase in policy rates.

While the interest rates are raised following the hike in policy rates, they do not come down as quickly when the policy rates are brought down.

This has been attributed to the deposit profile of banks. Banks which depend considerably on interest bearing deposits, which are fixed in nature, do not have the flexibility to pass on the impact of policy action immediately as their cost of funds as represented by the cost of fixed deposits does not decrease immediately.

According to the panel, most of the banks in India compute their base rates based on the weighted average cost of deposits. Hence, their base rates cannot be adjusted downwards immediately.

The panel, therefore, recommended that banks should consider computing the base rate on the basis of the marginal cost of funds.